With Nicole Duran, Senior Editor at Kiplinger
Trump Releases Unified Tax Reform Framework
On September 27, 2017, the Trump administration released highlights of its much-awaited Unified Tax Reform Framework— literally as a one-pager with nine points and without too many details. To understand the Trump tax plan, Steve spoke with Nicole Duran, Senior Editor at Kiplinger, overseeing government and political coverage.
Plan Proposes Deep Tax Cuts But Is Short On Details
Nicole cautions that the Trump tax plan framework is short on details and could change considerably before it passes Congress. The plan’s main priorities are to whittle down the number of individual tax brackets to three, cut the top corporate tax rate, eliminate the alternative minimum tax, and do things that they say will stimulate the economy.
Three Tax Brackets
The Trump tax plan wants to cut the number of tax brackets from seven currently to just three—12%, 25%, and 35%. It raises the lowest tax bracket from 10% to 12%, which critics say would hurt low-income Americans but the administration says will raise the income level for that lowest bracket so that a lot of poor Americans won’t have to pay any taxes. The problem, though, is that the framework does not specify income levels for each tax rate, so it’s hard to gauge its real impact. Critics also panned the 35% highest bracket because it sharply lowers taxes for the rich. Steve adds that lower tax rates would help seniors by reducing taxes on withdrawals from IRAs and other tax-deferred plans.
Doubles Standard Deduction
The Trump tax plan wants to double the standard deduction—the amount that filers can automatically deduct from their taxable income if they don’t itemize deductions and the one taken by a majority of filers—from $12,700 to $24,000. This higher standard deduction could mean that a lot of low-income Americans simply will not have to pay taxes.
Eliminates Federal Deduction For State Taxes
The plan may eliminate the Federal deduction for state taxes, which would significantly impact filers in states with high taxes, primarily “blue” Democrat-leaning states such as California, Oregon, Minnesota, New Jersey, and New York. This part of the plan faces strong opposition from elected Republican and Democrat representatives of those states who fear that their constituents will automatically have to pay significantly more in taxes.
Scraps AMT And Death Tax
The plan proposes scrapping the Alternative Minimum Tax, which could lead to tax savings for wealthy retirees who are subject to the AMT but would not help low-income seniors. The proposal also wants to eliminate the Death Tax, making it easier for wealth to be passed down through generations.
Lowers Tax Rate For Small Businesses
The Trump tax plan lowers the tax rate for small and family-owned businesses (S Corp., Sole Proprietorship, and Partnership) from 35% to 25%, offering big savings to those filers. Steve adds that profits from small businesses flow down to personal tax returns and raise income levels into higher tax rates, so limiting taxes on small business income to 25% will really help that group.
The next step is disclosing details on the Trump tax plan to the Congress and Senate and bringing it to vote. Nicole says the Republicans intend to push the plan through by using a parliamentary procedure called Budget Reconciliation which allows them to pass spending bills without fear of a filibuster, based on the simple majority Republicans currently hold in the House and the Senate.
In closing, Steve adds that there are still several hoops that the Trump tax plan has to jump through before it becomes law, and while Republicans want to get this done before year end so it applies to 2017 taxes, the battle has only just begun.
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Steve Pomeranz: Nicole Duran is a senior editor for Kiplinger and she oversees government and political coverage. I’ve asked her to join me today to discuss the details of the recent tax cut proposals, which have just been released. Welcome to the show, Nicole.
Nicole Duran: Thank you, glad to be here.
Steve Pomeranz: So, President Trump revealed the framework for his new tax plan. What can we expect?
Nicole Duran: Right, I would first caution that this is just a framework, and a lot can change between what we have now and what might ultimately pass Congress. That being said, we have a very good idea of what the President and Congressional Republicans want.
Their main priorities are to whittle down the number of individual tax brackets to three. They want to cut the top corporate tax rate. They want to eliminate things like the alternative and minimum tax and do a number of other things that they say will stimulate the economy.
Steve Pomeranz: All right, well, let’s get into that a little deeper now.
So right now, we have seven existing tax brackets and the proposal is to decrease that to just three.
Nicole Duran: Yeah.
Steve Pomeranz: 10%, 15%, and 35%. From the surface, that sounds like a good idea. Any problems with that?
Nicole Duran: Well, actually, it’s 12%, 25%.
Steve Pomeranz: Okay.
Nicole Duran: And 35. Right, so Democrats and critics would say the first problem with that is that you just took the lowest bracket from 10% to 12%.
Steve Pomeranz: Okay.
Nicole Duran: Now the President and his advisors—Gary Cohn was just briefing reporters yesterday at the White House—and he argues that they will raise how many people qualify for that lowest bracket and that actually many people will pay no taxes, more people than now. The only problem with that is we don’t know because they haven’t actually given us the income brackets that they want to fill in those levels with, so we don’t know. You don’t know what kind of income level they’re talking about right now.
Steve Pomeranz: Right, so let me just get back to these numbers that I misspoke. The three brackets are what again?
Nicole Duran: 12% would be the lowest and then 25% and 35%.
Steve Pomeranz: Okay, very good, so now we don’t really know how much money you have to make or declare for you to be in the 12% bracket or the 25 or the 35% bracket, so that matters.
Nicole Duran: That’s right, yeah.
Steve Pomeranz: Okay.
Nicole Duran: Absolutely, those details matter, that will quell or increase criticism once they give us those details. And as far as the 35% bracket, again, Democrats and critics immediately panned that because that’s lower than the top rate, so automatically, right?
Steve Pomeranz: One very important feature of this is the doubling of the standard deduction. First of all, for those who don’t know, what is the standard deduction?
Nicole Duran: The standard deduction is an amount that a filer can automatically take to reduce their taxable income if they don’t itemize. And the majority of people do not itemize their taxes.
Steve Pomeranz: Right, so it’s kind of the first tranche of money that you make that will not be taxed, so it’s the standard deduction. The government is talking about doubling the standard deduction from about twelve-seven to twenty-four thousand. So that’s going to, I think, take a lot of people out of the 12% or eliminate them from the 12% bracket. What do you think about that?
Nicole Duran: Right, exactly, and again, we don’t quite have all the numbers.
But that is exactly what the President and his advisors are saying. That many, many more people won’t have to pay any taxes. Or won’t even get to that 12% because of these increases. So again, we won’t know until we get the figures.
Steve Pomeranz: Now there are other factors in here. You mentioned the Alternative Minimum Tax, which a lot of retirees pay if they live in heavily taxed states in New York, New Jersey, and the like. And so that would be eliminated, but there’s also talk about eliminating the deduction for state taxes. Am I correct about that?
Nicole Duran: Yes.
Steve Pomeranz: So that’s going to be a big thing. So maybe for the lowering of the tax bracket itself from 39.5 to 35 seems like a tax cut. If you eliminate the deduction for the state taxes, it may take some of that back.
Nicole Duran: Absolutely, yeah, so there is [INAUDIBLE] of what effect that will have.
Well, frankly, a lot of Republicans, representatives from states such as New York, are deeply opposed to this and have been because they’re very concerned that their constituents will automatically have to pay significantly more in taxes. That is one of the ways the President and Republicans are proposing to pay for some of these tax cuts.
By eliminating that deduction, but it cuts both ways. A lot of people think that this only hurts quote, unquote blue states, democratic leaning states,
but it affects any state that allows you to do that and, of course, there are voters of all stripes in all states.
Steve Pomeranz: Yeah, of course. Yeah, I don’t think that’s political in and of itself. So also, this could mean big tax savings for many retirees. You write that these tax cuts may mean big tax savings for many retirees. And you think it’s an opportunity for retirees to start thinking about how to adjust to that. What would these tax savings be for retirees?
Nicole Duran: Well, as you said, many retirees are subject to the Alternative Minimum Tax. So right there, by eliminating that, you’ve helped a lot. Again, it would be your wealthier seniors, as your lower income seniors who probably aren’t paying taxes at all and wouldn’t be subject to it. There’s also the elimination of the estate tax. That’s not what they pay but their heirs. So as far as how much money they can pass on. And then these pass-throughs, they’re lowering the rates on what you call pass-through. This is people who file S corps and sole proprietorships and partnerships that get listed on their personal income taxes. And so that would lower the rate to 25% from 35%, so that is a huge savings there as well.
Steve Pomeranz: Right now, if you have a small business on your nest corporation, any of the income flows down to your personal tax return. So if you’re in a really big bracket, you’re going to pay that high tax bracket on that.
And this proposal is to limit that to 25%, so that’s a big deal. I think also if the tax brackets are reduced—you mentioned 12, 25, and 35—money coming out of IRAs and other tax-deferred assets will come out and be taxed less, so that may help as well.
Nicole Duran: Absolutely, absolutely, again, assuming they don’t change any of the rules though about IRAs and such.
Steve Pomeranz: Yeah, so we’re going to have this discussion again in not too long. Maybe another 60 days or so. We’ll see how the tax cut proposal goes through Congress. What do you think the next step is here, Nicole?
Nicole Duran: Well, the next step is passing a budget resolution. So I don’t want to get too deep in the weeds on you.
Steve Pomeranz: Yeah.
Nicole Duran: But Republicans intend to pursue tax reform and tax cuts by using a parliamentary procedure called budget reconciliation. And all that means is it allows them to pass bills, spending bills in the Senate without fear of a filibuster.
So, basically, with only Republican votes—and they have 52 seats in the Senate—so that means they don’t really have to deal with the Democrats if they can use this procedure. But the first thing they have to do is actually pass a budget resolution because you have to have something to reconcile.
And so you have to have this underlying resolution. It has to include instructions for tax cuts. So, in fact, since we’ve been speaking, the Senate Budget Committee laid out the text of their proposed budget resolution. The House has already done that. The House committee has already passed it. In fact, the House will probably vote on theirs next week. And now it looks like the Senate will be ready to as well. So, that’s step one.
Steve Pomeranz: Okay, all right, well, hold on. We’re out of time. So, let’s just say that the battle begins. I think they’re going to try to get this done before year end.
We’ll see what happens.
Nicole Duran: Yes.
Steve Pomeranz: My guest is Nicole Duran, Senior Editor of Kiplinger. Thank you so much for your information, Nicole.
Nicole Duran: Thanks for having me.
Steve Pomeranz: Sure, to hear this interview again, don’t forget to go to StevePomeranz.com.
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